Russia Seen Withstanding Rate-Cut Calls on Inflation Jump

Russia will probably refrain from
easing borrowing costs this month after inflation surged to a
15-month high and the central bank indicated it wouldn’t yield
to government calls for lower rates.

Bank Rossii will hold the refinancing rate at 8.25 percent
for a fifth month at tomorrow’s meeting in Moscow, according to
21 of 22 economists in a Bloomberg survey. One predicted a cut.
The overnight and one-week repurchase rates most used to lend
banks cash will stay at 5.5 percent and the overnight deposit
rate will be kept at 4.5 percent, two other surveys showed.

Russia, the largest emerging nation to raise rates in 2012,
is facing growing government pressure to ease monetary policy
after economic growth last year slowed to 3.4 percent, the
weakest since a 2009 recession. The central bank relies only on
its own forecasts and won’t be swayed, First Deputy Chairman
Alexei Ulyukayev said last week as data showed the quickest
inflation in 15 months in January.

“We expect the central bank to hold all of its key
rates,” Artem Arkhipov, an economist at ZAO UniCredit Bank in
Moscow, said Feb. 8 by e-mail. “They’ll probably cite the
short-term surge in inflation and the lack of a gap between the
economy’s current output and its potential.”

Derivative Bets

Three-month borrowing costs may drop 11 basis points, or
0.11 percentage point, over the next three months, according to
forward-rate agreements tracked by Bloomberg. That’s down from
24 basis points Jan. 14, the day before the last rates meeting.
The cost to swap floating interest payments into a fixed rate
for a year rose to 7.0741 percent after falling Feb. 8 to the
lowest level since May, according to data compiled by Bloomberg.

Economic growth slowed to 2.4 percent from a year earlier
in the fourth quarter, according to a Bloomberg survey, less
than half the annual target set by Prime Minister Dmitry Medvedev. Consumer prices rose 7.1 percent from a year earlier
in January, faster than all 21 forecasts in a Bloomberg survey.

Inflation may accelerate to 7.3 percent to 7.4 percent in
February from a year earlier, the Economy Ministry said in a
report today. The rate may fall in monthly terms to 0.6 percent
to 0.7 percent, down from a 1 percent advance in January.

Government officials including First Deputy Prime Minister
Igor Shuvalov and Finance Minister Anton Siluanov have joined
the Economy Ministry in the last month in saying interest rates
should be reduced because they’re smothering growth.

Government Relations

“Our relations with the government are just as they should
be, and the government respect’s the central bank’s independence
on monetary policy,” Ulyukayev told a Feb. 6 news conference.
“We’re going to make a decision based on our understanding,
after having listened to all the arguments, including from our
respected colleagues in the government.”

Bank Rossii raised all its interest rates in September as
consumer-price growth exceeded the 6 percent upper limit of
policy makers’ target range. It left borrowing costs unchanged
last month, saying that while economic growth was cooling,
inflation remained too high.

“Because of the political noise around the central bank,
they may want to explain their position more clearly,”
Alexander Morozov, chief economist for Russia at HSBC Holdings
Plc in Moscow, said Feb. 8 by phone. “First, that lower policy
rates would not help boost economic growth and second, that
conditions for policy rate cuts would require inflation to be
much lower.”

The central bank may reduce the repo and deposit rates by a
quarter-point in October, while the refinancing rate -- which is
of less importance to banks -- may be reduced earlier, according
to Morozov.

Key Phrase

Policy makers removed a phrase from January’s monthly
statement that market rates were acceptable for the “nearest
future,” which Ulyukayev has said is a signal that Bank Rossii
may change rates in any direction as soon as the next meeting.
Growth is near potential and any easing now would be
counterproductive, he told a conference last month.

Still, with President Vladimir Putin required to nominate a
new central bank chief three months before Chairman Sergey Ignatiev’s third and final term ends in June, policy makers may
not be resistant to calls for lower interest rates, according to
Julia Tsepliaeva, head of research for BNP Paribas SA in Moscow.

“Keeping rates on hold and failing to appease its critics
will dramatically increase the chances of an external candidate
taking the helm,” she wrote in a Feb. 8 report. “The bank will
not be immune to the rise in political pressure or the near
incessant media condemnation.”

Ignatiev, 65, told Putin at a meeting Jan. 31 that rates
would be lowered once inflation decelerates.

Billionaires’ Stance

Billionaires including Oleg Deripaska, chief executive
officer of United Co. Rusal, and the heads of Russia’s two
biggest banks have criticized the central bank for strangling
economic growth by focusing on damping inflation.

Investment in annual terms contracted twice in the last
four months of 2012, signaling that the spending needed to
support faster economic growth in the future is stalling.
Russia’s trade surplus fell 17 percent in December from a year
earlier as exports tumbled, the central bank said on its website
today.

Bank Rossii will probably wait until the inflation rate
falls later this year before easing rates, said Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in
Moscow.

“Inflation surprised negatively in January,” he said Feb.
8 by e-mail. “It would be detrimental to trust and market
confidence if they were to keep saying that they are independent
and inflation is a concern, but cut rates in order to
accommodate the pressure.”